Investors scoop up apartments as rents rise, vacancies fall in Sacramento area

The Sacramento real estate market has been a bargain basement for out-of-town investors for the last few years. They bought single-family homes by the thousands, scooped up warehouses by the dozens, and purchased entire city blocks of office space, often at rock-bottom prices.

Now with vacancy rates falling and rents on the rise, they’re snapping up apartments.

Investors spent more than $352 million on 56 apartment complexes in the greater Sacramento region this summer and fall, according to commercial real estate services firm Cassidy Turley. That was far more money, and a larger number of transactions, than in any similar period since the Great Recession officially ended in June 2009.

Most of the buyers have been from wealthier parts of the state – the Bay Area, Los Angeles and San Diego, experts said.

Be the first to know.

No one covers what is happening in our community better than we do. And with a digital subscription, you'll never miss a local story.

“Investors from coastal California have descended on Sacramento,” said Marc Ross, head of multifamily real estate for commercial brokerage CBRE in Sacramento.

Frustrated with high prices, they’re “forced to look at top secondary markets like Sacramento,” he said. “Sacramento has gotten a lot of attention because the fundamentals (rents and occupancy rates) are starting to surge, and because it’s the logical next market to invest in.”

CBRE’s record-setting sale of a Roseville apartment complex in October for $80.2 million was among a string of recent multimillion-dollar deals in the four-county region. A Bay Area firm that founded and owned Century Theatres was one of the buyers of Rosemeade at Olympus Pointe, a newer 465-unit complex in a prime part of Placer County.

Large apartment complexes in the North and South Natomas areas of Sacramento sold for $62 million, $30 million and $27 million in the second half of 2014. A 130-unit complex in Davis, home to thousands of university students and some of the region’s highest rents, fetched $40.5 million earlier this year.

Those prices were high for the Sacramento area, but investors from the Bay Area and Southern California – where big complexes can sell for hundreds of millions of dollars – likely considered them bargains, commercial real estate brokers said.

“Folks coming from Silicon Valley and Southern California can get more price per pound in Sacramento,” said Aaron Frederick, a senior vice president and apartment specialist with brokerage Colliers International in Sacramento.

Rents are much lower in the Sacramento area than in the Bay Area, but buildings in Sacramento can be cheap compared to the rental income they generate, Frederick said. Investors will often earn a greater rate of return in Sacramento than in the priciest parts of the Bay Area, he said. They can also afford to buy more units here.

“They say, ‘I’d rather go to Sacramento and get more,’” Frederick said.

There are a number of other factors behind the spate of recent purchases. Interest rates to buy apartment buildings are historically low at about 4 percent to 5 percent. And rents have been rising as the number of vacant apartments shrinks.

By the end of September, vacancy rates in the greater Sacramento region – Sacramento, Placer, Yolo and El Dorado counties – had fallen to a record low of 3.8 percent, Cassidy Turley reported in its latest market “snapshot.” Vacancy rates have been falling steadily since the spring of 2012, when they topped out at 6.7 percent, the firm said.

“In roughly 25 years of tracking the marketplace, vacancy has never been as low as it is now,” the firm’s research director, Garrick Brown, wrote in the report.

As vacancy rates fell, rents climbed. The average asking rent for all apartments in the four-county region jumped 11 percent in the past two years to $1,069, Cassidy Turley reported. For several years before the upswing, rents were largely flat, the firm said.

Though demand has grown, supply has not. In the Sacramento region, developers have hardly built any new apartments since the last wave of construction in the early 2000s. Recent construction figures have been far below historical averages.

In a typical year before the recession, developers built 2,000 to 4,000 new units in the region, but that number shrank dramatically in last decade’s downturn. At the low point in 2010, only 123 new units were built, Cassidy Turley reported.

Today about 1,500 units are under construction, but that’s probably not enough to make a dent in rents or vacancy levels, the firm said.

A few larger apartment complexes are being built in West Sacramento and Roseville, and a number of midsize residential buildings are going up in midtown Sacramento. Yet it’s just a small addition to the region’s overall rental inventory.

“The fact we can talk about every individual deal is an example of how small the (new) supply is,” Ross said.

Demand for rentals has increased partly because fewer families can buy homes after the massive wave of foreclosures and layoffs that swept the region. Credit and income issues are still a major hurdle for many.

“When people can no longer afford single-family homes, they become renters,” Frederick said.

At the same time, more young people are opting to rent instead of buy. Homeownership doesn’t seem as desirable after the housing collapse, he said.

“The American dream of owning a home lost (some of its appeal) after the last crash,” Frederick said. For some, “buying a home and taking on (debt) becomes a liability instead of an asset.”

Members of prior generations would hold the same job for 30 years and pay off a 30-year mortgage, he said. Now people have to be mobile to keep working and earn more. They don’t want to be trapped in a home worth less than they owe.

“In California, where we’ve got a lot of young folks who witnessed their parents losing their home after its value dropped from $500,000 to $250,000, they’re shying away from home ownership,” Frederick said.

“It bodes very well for the apartment market,” he said. “Rentals are going to be one of the better investment products out there.”